LL Flooring Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Lumber Liquidator's fourth quarter and full year 2020 earnings conference call. As a reminder, this conference is being recorded and may not be reproduced in full or in part without permission from the company. I would now like to turn the conference over to Julie McMean. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us. Today, I'm joined by Charles Tyson, our President and Chief Executive Officer, and Nancy Walsh, our Chief Financial Officer. As we begin, let me reference the safe harbor provision of the U.S. securities laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of lumber liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in Lumber Liquidators' filings with the SEC. During today's conference call, management will be discussing results on an adjusted basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in today's earnings release. The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative after today, and Lumber Liquidators undertakes no obligation to update any information discussed in this call. Now, I'm pleased to introduce President and CEO, Charles Tyson. Charles?

Thank you, Julie. A year ago, I shared with you my excitement about the opportunities ahead for us to leverage a solid foundation as a high-touch specialty flooring company, execute a transformation plan, and deliver shareholder value. As I look back on 2020, I'm both proud of all that our team has accomplished and energized by how much opportunity still lies ahead. 2020 was a dynamic and challenging year. Customers demanded a safe, omnichannel shopping experience, and our teams rose to the occasion. I want to thank our entire team for their commitment, flexibility, and perseverance throughout the entire year to deliver both strong financial results and outstanding service to our customers. I'm very proud to be leading such a dedicated team who are working every day to execute our transformation strategy and elevate the experience for all customers, whether they are DIY, Do It For Me, or our pros. I also want to thank our vendors, landlords, and suppliers for helping us navigate through the COVID-19 environment to service our customers. Turning to our positive results for the quarter, we demonstrated solid progress on our transformation plan, which positioned us to take advantage of a robust home improvement spending environment. In the fourth quarter, increase in comp sales. We also achieved an impressive operating income of $18 million when compared to $19 million in the fourth quarter of 2019. given that the prior year fourth quarter included a one-time $11 million benefit from the retroactive exclusion of Section 301 tariffs. This underscores the underlying operating profit improvement we achieved in 2020 versus 2019. For the full year, we delivered $1.1 billion in net sales, flat to 2019, demonstrating resilience as we navigated the COVID-19 shutdown in the spring to grow comp sales 10.8% in the second half of 2020. We also achieved significantly higher profitability due to progress on our profit initiatives, with adjusted operating income of $64 million, up from $25 million in 2019, and an adjusted operating margin of 5.8%. up 350 basis points versus 2019. These strong fourth quarter and full year financial results reflect our continued execution against our strategic pillars of people and culture, improving the customer experience, driving traffic and transactions in our stores and online, and improving profitability. Our first strategic pillar, people and culture, is a critical driving force behind our transformation strategy. During the fourth quarter, we formalized our company's vision, purpose, and values, making a critical step in developing our culture and executing our strategy to serve our customers at the highest level. Our vision is to be the customer's first choice in hard surface flooring by providing the best experience from start to finish. Focusing on our associates, we're deploying robust training programs that help them achieve this vision by better serving our customers. We are making progress on ensuring that we have the right leaders in the right roles to effectively achieve our company's goals. During the fourth quarter, we added more regional and store managers in training to build our bench for future store leadership. Our second pillar is improving the customer experience. First, I want to reiterate our brand promise to our customers. We offer a wide selection of high-quality stock products and the accessible flooring expertise and service of a local store with the scale, omnichannel convenience, and value of a national chain. We plan to leverage this advantage to differentiate ourselves in the highly fragmented flooring market. During the fourth quarter, we made good progress towards elevating the customer experience. I'm pleased to announce the launch of our new digital platform in December of 2020. If you've not visited the new llflooring.com site, I encourage you to take a look. The mobile-friendly site features inspirational content that better tells our story, clearly showcases our flooring in digital room scenes, highlights our digital tools like Picture It and Floor Finder, and promotes our services such as installation, free flooring samples, and delivery. Installation is an important service that we provide. Fourth quarter installation sales were up versus the same period in 2019 and sequentially from the third quarter, reflecting progress on our initiatives and the willingness by customers to have installers in their homes. New installation assessment trends indicate demand for installation services remain strong. However, we will monitor the COVID-19 environment and customers' continued willingness to have installers in their homes. During the fourth quarter, we began testing a new in-store portal for installation that will increase efficiency for our store associates and reduce turnaround time for our customers when quoting new jobs. Our sales to pros were flat in the fourth quarter versus a year ago. Building our pro business is a core element of our transformation strategy. we remain focused on transitioning from a transactional sales approach to building longer-term relationships and credibility with pros, which will take some time. We expect to drive growth during this evolution, and we are investing in tools and sales strategies, including our new trial, scale, and retention program, which provides a roadmap to our store associates, as they build trusted partnerships with this important customer segment. Our teams are also working hard to learn more about what our pros want and where we are leveraging enhanced reporting to better understand pro behaviors at the local store level. Finally, we are watching the impact of COVID-19 on customers letting pros into their homes. Turning to our third strategic pillar of driving traffic and transactions in both stores and online. For the fourth quarter, our web sales increased more than 90% versus 2019. We're pleased with the new customer growth our investment in digital marketing is delivering, and we're encouraged to see so many customers want to engage online for large ticket purchases. We're extremely excited about our new digital platform that launched at the end of fourth quarter. This new platform builds on the great work our teams have done over the past two years and further advances our omnichannel strategy. We're particularly pleased with how the enhanced mobile experience is engaging our customers. Our product assortment is a key competitive advantage and traffic driver. During the fourth quarter, we emphasized driving new design and innovation in our most popular vinyl and wood categories, such as our Bella Wood brand. Vinyl benefited from an expanded assortment, and we see room to expand it further in 2021. As a high-touch, high-surface flooring retailer, we also emphasize selling a complete solution to our customers. adding the necessary higher margin attachments such as moldings and other accessories. We were pleased with the comp growth and accessory sales in the fourth quarter versus 2019. This growth was significantly driven by training programs for sales associates and increased awareness through llflooring.com. We continue to evolve our brand, and both the new digital platform and the physical stores are critical components of this. We're pleased with the performance of our brand revitalization pilot of 20-plus stores. Based on early feedback, customers who experienced the LL Flooring brand viewed it as more approachable, relevant, and of higher quality. We're looking forward to the broader rollout of the brand revitalization for our stores this spring as part of our long-term brand evolution. And fourth, improving profitability. In the fourth quarter, execution of our gross margin improvement strategies was meaningful. Our merchant and sourcing teams continued their work on improving pricing and promotional strategies, introducing new products and driving our alternative country sourcing strategies to improve gross margins. We ended 2020 with 34% of our goods purchased from China, down from 46% for the full year of 2019. The pace of our sourcing diversification is impressive, given the substantial vetting process we undertake to ensure our rigorous quality standards are met. Our fourth quarter adjusted gross profit was $116 million, up from $112 million in 2019. An adjusted gross margin was 38% compared to 41% in the fourth quarter of 2019. It's hard to see the full impact of our good work on gross margin because we're comparing against the $13 million one-time benefit in the fourth quarter of 2019 from the retroactive exclusion of Section 301 tariffs. When excluding that item, our adjusted gross margin increased 200 basis points from the fourth quarter of 2019. We remain focused on executing our transformation plan and making progress against our strategic pillars to position us for long-term success. I want to briefly update you on recent developments under each of our four pillars. First, let's start with people and culture. Our diversity, equity, and inclusion task force, comprised of a cross-functional team of associates, has created a working charter and is in the process of identifying programs targeting the company's ability to attract, develop, promote, and retain an inclusive workforce. Our commitment to training to build a high-performance organization remains in 2021. After establishing our vision, purpose, and values in the fourth quarter, we began to socialize and reinforce them with our leadership. We've developed a robust program to communicate our messaging around our core values and commitments throughout the organization. I'm really excited about what we can achieve as one team aligned around a singular vision. Moving to improving the customer experience. In 2021, delivering a seamless, omnichannel experience remains a top priority. With our new digital platform, we are better able to reach our customers with new, relevant content, such as how-to videos and our LL-style home design content, showcasing the latest trends. We will also make sure we have the right people in the right roles, and the staffing to serve our customers however they want to be served, and we will empower our sales associates to leverage our online tools and capabilities in the store. In the fourth quarter of 2020, we began to roll out new tablets and enhanced Wi-Fi capabilities, with that deployment largely completed by the end of January. Sales associates can now better conduct both in-person and virtual consultations to guide customers, partner with pros, and drive install efficiency. In addition, the tablets further enhance our ability to deliver training across our organization. We also upgrade the technology in our Customer Relationship Center to a more efficient, lower-cost support model for associates to engage our customers. This technology is key to driving the seamless customer experience across all channels of engagement with our brand. We have rolled out the new installation portal to all stores and will be enhancing its capabilities in future quarters. Turning to our pro customers, we see an opportunity to win with the pros who want a wider choice, a trend-right assortment, and a high level of service and expertise that allows them to delight their customers. Building our relationships with pros is a key focus. We recently launched a pilot program in a number of major markets with outside pro account reps to better serve these potential high-growth accounts. In 2021, we will develop and launch programs that make it easier and more compelling for pros to do business with us, and we look forward to updating you on future capabilities in upcoming quarters. I'd like to share an example of how our stores are elevating their relationship with the pros. A new pro account rep, Laura Dubwitson, reconnected with a pro customer in Denver who had not shopped with us since 2018 and discussed the value of LL Flooring. The pro had an immediate opportunity for us. He was looking for a 5-inch hickory hardwood for a current project. Our Denver store manager, Sean Coshing, provided options to Laura, and the pro picked his top two. Laura and Shane then opened the store early to cater to the pro's tight schedule. During the store meeting, they expanded the discussion beyond hardwood to encompass other flooring and accessory options. In less than a week, Laura and the Denver team secured a hickory hardwood order, a luxury vinyl plank order, and custom-ordered matching stair treads. Communication with the store, customer, and Laura has been great, and the pro is building trust that LL is the place he should do his business. He told the store team and Laura that he had another large show coming up very soon. Laura, Sean, and the Denver store team all stepped up to take care of the pro, and they are positive that he will be an active customer in 2021. This story highlights the opportunity we have to build stronger relationships with pro customers, to sell a complete solution, and to build repeat business. Great work, Laura, Sean, and team. Thank you. Turning to our objective of driving traffic and transactions with customers. Our customers have responded extremely well to our picture and floor finder tools, and we've just begun to take advantage of the power of our new digital platform that gives us more agility and speed to better showcase our flooring and services and drive traffic to our stores. We'll continue to invest in our vinyl and hardwood assortment and drive innovation in areas such as water-resistant flooring. With our new website, we can rapidly update new offerings and leverage our omnichannel strength to expand our assortment online with exclusive SKUs and then look to introduce the most popular SKUs into our stores. We will also promote attachment selling of items such as moldings, stairs, and grills. We'll build on our digital marketing success in 2020. We'll continue to prioritize digital marketing, expanding our efforts on search and social, where our customers begin their inspiration journey. In 2021, we will also focus our targeted television advertising, such as HGTV. These efforts will attract new audiences and drive high-quality, intent-driven traffic to LLFlooring.com that we can convert into transactions. As it relates to the rebranding of our stores, based on early feedback from customers, we believe the store rebranding will help make our stores more attractive and approachable, and we're excited about leveraging our physical store footprint to further reinforce our value proposition. We're planning a broad-scale rebranding of our stores in 2021, and we look forward to updating you on future calls regarding our progress. Finally, we continue to work on improving profitability. We are investing in and building momentum around our internal growth initiatives as we execute our transformation strategies. Given the uncertainty due to COVID-19, we are not providing financial guidance in 2021 at this time. We would, however, like to share some color around our outlook and approach for the year. The second half of 2020 was a period of substantial expansion in the home improvement sector, and we believe several trends that boosted consumer spending in our category in 2020 will persist early in 21. Residential investment, existing home sales, and rising home prices spurred by low interest rates should continue to provide tailwinds. That said, there remains a significant number of unknowns this year, such as risks from renewed shutdowns due to COVID-19 and consumer spending preferences once and if people become more mobile later this year as the vaccine rolls out. We are watching how install and pro sales are impacted by customers' willingness to have contractors enter their home. balancing the nesting behaviors that is a positive for DIY customers. Visibility later in the year is more limited at this time, but we anticipate that customers may begin to shift some spending away from home improvement and more towards travel, leisure services, and apparel once it becomes safer to leave the home. And we will face tougher comparisons in the third and fourth quarter of 2021. We also remain focused on the current volatility of international supply chain and domestic hardwood supply with the potential for further disruptions. We believe we could have captured more sales in the fourth quarter if our inventories had been higher. That said, our field teams did great work offering customers alternative products and managing inventory flow from our DCs to stores to fulfill orders. Based on what we know today, and barring any further supply chain disruptions, we expect our on-hand inventories to be similar from now through the end of the first half of 2021 and to increase to more optimal levels of between $270 and $290 million in the second half. In the midst of all these cross-currents in the operating environment, we are focused on executing our transformation initiatives. For example, our LLFlooring.com digital platform is still new, but we are pleased with the new customer growth we're generating. Our teams are better equipped to improve the customer experience through new technologies and services, and we're building momentum in creating our new high-performance culture. Our teams are energized around being the customer's first choice in hard surface flooring, remaining agile and optimizing our opportunity in an uncertain operating environment. Turning to gross margin, we've done a lot of good work over the past two years to improve our margin. In 2021, we expect tariffs, transportation, and raw material costs to be headwinds. In order to offset these headwinds, we will continue to execute our mitigation strategies of reducing our costs through alternative country sourcing, partnering with vendors to introduce new products, and through enhanced pricing and promotion strategies. First, tariffs. We will be unfavorably impacted by the reinstatement of 25% Section 301 tariffs that went into effect on August 2020. Leveraging best country sourcing for our entire suite of products across all of our operations remains key to our cost mitigation strategy. Imports from China at the end of 2020 were 34% down from 46% for the full year 2019. We are continuing to review the opportunity for best country sourcing that meets our stringent quality standards. I also want to point out that the global supply chain remains constrained due to the strong demand for inventory during the post-COVID-19 recovery and tight domestic hardwood supply as our suppliers have been impacted by COVID-19. This could unfavorably impact our gross margins in 2021 for both higher transportation and raw material input costs. We are monitoring transportation costs, both international and domestic, as our contracts come up for renewal this year. We will look to offset higher sourcing costs through pricing and promotion strategies while monitoring the market to inform and guide our decisions. With respect to SG&A in 2021, we will maintain disciplined expense management. We are really pleased with the effectiveness and efficiency we are achieving on lower marketing spend given our focus on digital, and we feel good about the current level of marketing spend as a percent of sales. We plan to leverage the base SG&A expense year over year and reinvest expense savings in our growth initiatives, including new technology to improve the customer experience, investment in our teams, the opening of new stores, and investing in our pro business with our Pro Account Rep program. These strategic initiatives are expected to deliver appropriate returns for the company based on our internal hurdle rates. In summary, we're excited about the progress we've made on our transformation initiatives and the strong profitability improvements we delivered in 2020. Our team is highly engaged and focused on elevating the customer experience and making LL Flooring the customer's first choice in meeting their hard flooring needs. We've defined our vision, values, and how we're going to win with our customers, and we've got a robust execution plan in place for 2021. We've also proven our ability to navigate an uncertain macro environment and we will remain agile and disciplined as we execute our plan. We look forward to reporting on our progress each quarter. I'll now turn the call over to Nancy to share the financial details of the quarter. Nancy?